Real estate investors know how to get creative when it comes to money—that’s no secret! Now more than ever there are options available for real estate investors of all experience levels and financial means to get involved in investing. But sometimes, it’s hard to know what method is going to land you with the best returns.
It used to be difficult to compete in hot markets thanks to all-cash investors, but nowadays, it seems more investors are turning back to traditional financing and private money lending. So really, what’s the better option for buy-and-hold real estate investors?
Hopefully we’ll be able to shed some light on the subject.
All-Cash or Financing: Which Route for Acquiring Investment Properties?
We’ll be upfront: sometimes, this has less to do with what’s objectively a better choice and more to do what what your individual situation and resources happen to be. So look at what’s here and weigh it for yourself!
Ka-Ching! All-Cash Pros
Attractive Offers
In the wake of the recession, many investors used all-cash offers to inspire confidence in sellers and breathe new life back into the real estate market. Now, all-cash offers are attractive because they can close a deal quickly and cleanly. In competitive markets, an all-cash offer gives an investor an edge over other bidders, big time.
No Monthly Mortgage
Obviously, one of the biggest perks to paying all cash upfront is the lack of a monthly mortgage payment, which is where one of the biggest monthly expenses comes from for most investors. When you pay in cash, it’s not there, meaning your monthly cash flow is higher month-over-month, even with other expenses.
Save on Interest Payments
In a mortgage, so much of the cost over time comes from interest. If you pay in cash, you’re obviously not having to pay interest to anything because you didn’t take out a loan. That’s long-term savings for you, which is particularly helpful in seasons where interest rates are high.
Equity Now
Does anything feel better than ownership? You own it. It’s yours. You can do with it what you will. Need to sell? Boom. You can sell. Not complicated. Second mortgage? Sure, why not. If you want to explore your options, you can explore them with the comfort of knowing you own your property.
All-Cash Cons
No Leverage
Where possible, it’s preferable that investors not use their own money. When you can leverage other resources, you benefit. When you use the bank’s money, you’re putting down maybe 15-20% of your own money, and then earning a return on investment. If you’re paying all cash, it’s all you. 100% your money, and that’s leverage lost.
Resource Demands
Not every investor has the resources to make all-cash offers, plain and simple. Even if they can make one all-cash offer, making multiple offers is a challenge, and something that takes time to build up to. On the flip side, it’s a faster track to get approved for financing with a down payment than it is to amass the entire sum. Unless you’re an investor with near-bottomless resources at your disposal, constant all-cash offers probably isn’t a realistic or feasible strategy.
Financing Pros
Leverage
Obviously, the big pro of financing, whether through a bank or privately, is the leverage gained. If you’re not using your own money and have a solid investment strategy that allows you to be smart and strategic with your mortgage or private money loan, you can start accessing more deals and finding more success than is within your reach with your money alone.
A key goal of every passive real estate investor should be to acquire as many properties as possible. You MUST build a portfolio. Leverage definitely assists with making that goal occur faster.
Acquire More Properties
By that same token, leverage allows you to spread out more. Because you’re not having to pay all of everything, upfront, you have more to delegate. While there are limits on the number of bank loans you can take out, there are ways to get creative. Financing allows you to stretch your money more if you don’t have the capital to buy with all-cash.
Increase Returns Overall
Wait a second—won’t your returns be less if you’re having to pay a mortgage every month? Not necessarily. Mark Ferguson of InvestFourMore breaks down how he gets amazing cash returns on his financed properties—more-so than he would if he paid all cash. Current low interest rates play a role, but it’s very possible that you can get better returns with financing than with all cash. Run the numbers and see for yourself first!
I am a big fan of focusing on the income I make on my investments. These are all long-term investments for me. As a result, on many occasions, I own a property for more than an appraiser may value it and I put more cash into a downpayment than the standard 25%. I finance the difference, yet earn a return against each dollar I put into the property. My goal is to pay off leverage as fast as possible, so I am not bothered in the least with putting more than 25% down. If the economics of the income are in line - I just want to get my dollars earning and paid back as soon as possible.
Financing Cons
The Mortgage
That said, the mortgage every month can put a big damper on your positive cash flow, no doubt about it. No one enjoys paying it, and the interest can add up over time. Eliminating that mortgage payment is a goal for many real estate investors, and the idea of not having it all from the outset—and not dealing with interest at all—is extremely attractive.
And...do not forget. During the first 80% of the life of your loan, interest expense will be the LARGEST expense you will pay on your property. It absolutely eats into your income and every investor should absolutely be looking to eliminate interest as son as possible.
It Can Hurt in Competition
In highly competitive markets where all-cash offers can close a deal quickly, having traditional financing, even lined up and ready-to-go, might hurt your chances of coming out on top. It might seem unfair, but that just tends to be how it is.
Really, at the end of the day, your financing decisions come down to a few factors: one, and most importantly, the math. Does it make sense for you and your goals? And two, just your goals. Does all-cash suit your style? What you want to achieve? Where is your comfort zone?
No matter what you financial path looks like, there’s room for you to find success in real estate investment with great returns. Start securing your financial future today!
